Corporate foreign exchange risk management: A study in decision making under uncertainty

Abstract

Abstract This paper examines the management of foreign exchange risk in multinational corporations in light of the conclusions of previous empirical and theoretical investigations into decision making under uncertainty. Cognitive perceptions of risk and uncertainty are shown to underlie the hedging decisions made by corporate treasury managers, which are often demonstrably sub‐optimal in a Bayesian expected utility framework. The findings suggest that simple principal‐agent approaches to explaining seemingly sub‐optimal corporate risk management preferences are inadequate inasmuch as they fail to account for the markedly different perspectives on risk and uncertainty taken by financial economists (qua economists) and corporate financial risk managers.

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